United States – Certain Tax Credits under the
Inflation Reduction Act
Request for the Establishment of a Panel by china
The
following communication, dated 15 July 2024, from the
delegation of China to the Chairperson of the Dispute Settlement Body, is
circulated pursuant to Article 6.2 of the DSU.
_______________
1._
My authorities
have instructed me to request the establishment of a panel with respect to
certain subsidy measures adopted by the United States that are contingent upon
the use of domestic over imported goods or that otherwise discriminate against
goods of Chinese origin.
2._
On 26 March 2024,
China requested consultations with the Government of the United States
("US") pursuant to Articles 1 and 4 of the Understanding on Rules and Procedures Governing the Settlement of
Disputes ("DSU"), Article XXIII of the General Agreement on Tariffs and Trade 1994
("GATT 1994"), Article 8 of the Agreement
on Trade-Related Investment Measures ("TRIMs Agreement"),
and Articles 4 and 30 of the Agreement on
Subsidies and Countervailing Measures
("SCM Agreement"). Consultations were held on 7 May 2024 with a
view to reaching a mutually satisfactory solution. Unfortunately, these
consultations failed to resolve the dispute.
3._
Therefore, China
submits this request pursuant to Articles 4.7 and 6 of the DSU, Article XXIII:2
of the GATT 1994, Article 8 of the TRIMs Agreement, and Articles 4 and 30 of
the SCM Agreement.
4._
Part I of
this request for the establishment of a panel identifies the measures at issue.
Part II
provides a brief summary of the legal basis for China's claims against those
measures.
I._
MEASURES AT ISSUE
5._
On 16 August
2022, the Inflation Reduction Act, P.L. 117-169, 136 Stat. 1818 ("IRA")
was signed into law. The IRA may be the largest single subsidy measure in
modern economic history. Official estimates of the climate-related subsidies
provided under the IRA place their value at $393 billion. Other
independent studies have estimated that the value of these subsidies exceeds $1 trillion.
6._
While the
subsidies provided under the IRA are massive and far-reaching in their economic
effects, this request for the establishment of a panel concerns only certain
subsidies provided under the IRA that are contingent, in one way or another,
upon the use of domestic over imported goods or that otherwise discriminate
against goods of Chinese origin. These are: (1) the Clean Vehicle Credit;[1]
(2) the Investment Tax Credit for Energy Property;[2]
(3) the Clean Electricity Investment Tax Credit;[3]
(4) the Production Tax Credit for Electricity from Renewables;[4]
and (5) the Clean Electricity Production Tax Credit.[5]
Part A
addresses the Clean Vehicle Credit (subsidy (1)), while Part B
addresses subsidies (2) through (5) (hereinafter referred to collectively as
the "Renewable Energy Tax Credits").
7._
China strongly
supports national and international efforts to reduce and mitigate the effects
of climate change, including through the use of clean energy subsidies provided
in accordance with the WTO Agreement. International trade in clean energy
products, including the inputs to those products, can accelerate and reduce the
costs of the clean energy transition when undertaken in accordance with the WTO
Agreement. Non-prohibited, non-discriminatory subsidies have a role to play in
this transition.
8._
However,
subsidies that violate the WTO Agreement, including subsidies that are
contingent upon the use of domestic over imported goods or that otherwise
discriminate against imported goods, remain prohibited and threaten to
undermine international cooperation on reducing and mitigating the effects of
climate change. The subsidies at issue in this request for the establishment of
a panel are of this type. They are discriminatory, protectionist, and contrary
to WTO rules. They do nothing to advance the shared interest that all Members
have in addressing climate change and are to be condemned.
A._ The Clean Vehicle Credit
9._
Section 13401 of
the IRA establishes the Clean Vehicle Credit for qualifying electric vehicles
("EVs"). To qualify for the Clean Vehicle Credit, final assembly of
the qualifying vehicle must take place in North America.[6]
The North American assembly requirement is a condition for obtaining either or
both of the two components of the Clean Vehicle Credit: (1) the critical
minerals component, worth $3,750 per vehicle; and (2) the battery component,
worth an additional $3,750 per vehicle.
10._
To qualify for
the $3,750 critical minerals component of the Clean Vehicle Credit, a
percentage of the value of applicable critical minerals contained in the
vehicle battery must (i) be extracted or processed in the United States; (ii)
be extracted or processed in a country with which the United States has a free
trade agreement; or (iii) have been recycled in North America. Applicable
percentages increase from 40 percent prior to 2024 to 80 percent after 2026.[7]
Qualifying critical minerals include, inter alia,
aluminium, cobalt, lithium, nickel, and graphite.
11._
In addition,
after calendar year 2024, a clean vehicle will not qualify for the critical
minerals component of the Clean Vehicle Credit if it contains any critical
minerals that were "extracted, processed, or recycled by a foreign entity
of concern".[8]
A "foreign entity of concern", or "FEOC", is defined to
include, inter alia, a foreign entity that is
"owned by, controlled by, or subject to the jurisdiction or direction of a
government of a foreign country that is a covered nation…".[9]
A "covered nation" includes the People's Republic of China.[10]
12._
To qualify for
the $3,750 battery component of the Clean Vehicle Credit, a certain percentage
of the value of the battery components in an EV must be manufactured or
assembled in North America. Applicable percentages increase from 50
percent prior to 2024 to 100 percent after 2028.[11]
In addition, after 31 December 2023, a vehicle does not qualify for the battery
component of the credit if any "components" contained in its battery
are "manufactured or assembled by a foreign entity of concern" as
specified above.[12]
B._ Renewable Energy Tax Credits
13._
The IRA extends
and modifies certain pre-existing investment tax credits ("ITCs") and
production tax credits ("PTCs") for renewable energy projects. The
ITCs provide tax subsidies for investments in eligible renewable energy
projects while the PTCs provide tax subsidies for power generated from eligible
renewable energy sources. The modified ITC and PTC tax credits include bonus
subsidy elements that are contingent upon the use of domestic over imported
goods.
14._
The IRA has two
related investment tax credits for renewable energy projects. The first, the
Investment Tax Credit for Energy Property, is codified at 26 U.S.C. 48 and is
available for eligible renewable energy projects for which construction begins
prior to 1 January 2025. The second investment tax credit available under the
IRA, the Clean Electricity Investment Tax Credit, is codified at 26 U.S.C. 48E
and is available for eligible renewable energy projects placed in service after
31 December 2024. The base tax credit under both programmes is six percent of
the qualified investment in the energy property.
15._
The IRA also has
two related production tax credits for energy produced from eligible renewable
energy sources. The first, the Production Tax Credit for Electricity from
Renewables, is codified at 26 U.S.C. 45 and is available over a 10-year period
for energy produced from projects that begin construction prior to 1 January
2025. The second, the Clean Electricity Production Tax Credit, is codified at
26 U.S.C. 45Y and is available over a 10-year period for energy produced from
projects placed in service after 31 December 2024. The base credit available
under both programmes is $0.03/kW, inflation adjusted.
16._
The two ITC
programmes and the two PTC programmes contain bonus subsidy elements that are
contingent upon the use of domestic over imported goods. For the ITC
programmes, the amount of the tax credit is increased by 10 percentage points
if the domestic content requirements are satisfied.[13]
For the PTC programmes, the amount of the tax credit is increased by 10 percent
if the domestic content requirements are satisfied.[14]
17._
The domestic
content requirements for the four Renewable Energy Tax Credits are the same.
Specifically, the eligible project must use 100 percent domestic steel and iron
for construction materials (the "Steel and Iron Requirement"). In
addition, a certain percentage of the components incorporated into an eligible
project must be produced in the United States (the "Manufactured Products
Requirement"). The percentage of incorporated components that must be
produced in the United States varies over time and also in relation to the type
of renewable energy project.
C. Summary of Measures at Issue
18._
Taking into
account the foregoing, the measures at issue include, inter alia:
a._
The Inflation
Reduction Act, P.L. 117-169, 136 Stat. 1818;
b._
Internal Revenue
Service, Section 30D New Clean Vehicle Credit, Proposed Rule, 88 FR 23370
(17 April 2023);
c._
Internal Revenue
Service, Section 30D Excluded Entities, Proposed Rule, 88 FR 84098 (4 December
2023);
d._
Internal Revenue
Service, Clean Vehicle Credits Under Sections 25E and 30D; Transfer of Credits;
Critical Minerals and Battery Components; Foreign Entities of Concern, Final
Regulations, 89 FR 37706 (6 May 2024);
e._
Department of
Energy, Interpretation of Foreign Entity of Concern, Proposed Rule, 88 FR 84082
(4 December 2023);
f._
Department of
Energy, Interpretation of Foreign Entity of Concern, Final Rule, 89 FR 37079 (6
May 2024);
g._
Internal Revenue
Service, Definition of Energy Property and Rules Applicable to the Energy
Credit, 88 FR 82188 (22 November 2023);
h._
Internal Revenue
Service, Section 45Y Clean Energy Production Credit and Section 48E Clean
Electricity Investment Credit, Proposed Rule, 89 FR 47792 (3 June 2024);
i._
Internal Revenue
Service, Domestic Content Bonus Credit Guidance under Sections 45, 45Y, 48, and
48E (12 May 2023) (Notice 2023-38);
j._
Internal Revenue
Service, Domestic Content Bonus Credit Amounts under the Inflation Reduction
Act of 2022: Expansion of Applicable Projects for Safe Harbor in Notice 2023‑38
and New Elective Safe Harbor to Determine Cost Percentages for Adjusted
Percentage Rule (16 May 2024) (Notice 2024-41).
19._
The measures at
issue include any amendments, supplements, or extensions to the measures
specified above, as well as any replacement or implementing measures. Without
prejudice to the generality of the foregoing, the measures at issue include any
proposed regulations, final regulations, frequently asked questions, or other
forms of administrative interpretation or guidance relating to the Clean
Vehicle Credit or the Renewable Energy Tax Credits.
_ II._
LEGAL BASIS OF THE COMPLAINT
20._
The U.S. measures
listed in Section I of
this request for the establishment of a panel are inconsistent with the United
States' obligations under multiple provisions of the covered agreements.
21._
China considers
that the Clean Vehicle Credit is inconsistent with the following provisions of
the covered agreements:
a._
Article I:1 of
the GATT 1994, because by conditioning eligibility for the Clean Vehicle Credit
on the North American assembly requirement, the critical minerals requirement,
and the battery requirement (whether these three requirements are viewed
separately or in any combination), and also by restricting eligibility for the
Clean Vehicle Credit in the case of vehicles incorporating critical minerals
and battery components produced by so-called "foreign entities of
concern", the United States does not accord to products of Chinese origin
immediately and unconditionally the same advantages, favours, privileges, or
immunities in respect of matters referred to in paragraph III:4 of the GATT
1994 that the United States accords to like products originating in the
territory of other countries.
b._
Article III:4 of
the GATT 1994, because by conditioning eligibility for the Clean Vehicle Credit
on the North American assembly requirement, the critical minerals requirement,
and the battery requirement (whether these three requirements are viewed separately
or in any combination), and also by restricting eligibility for the Clean
Vehicle Credit in the case of vehicles incorporating critical minerals and
battery components produced by so-called "foreign entities of
concern", the United States does not accord to products of Chinese origin
treatment no less favourable than the treatment accorded to like products of
national origin in respect of laws, regulations, and requirements affecting the
internal sale, offering for sale, purchase, transportation, distribution or use
of the affected products.
c._
Article 2.1 of
the TRIMs Agreement, because the measures at issue appear to be investment
measures related to trade in goods that are inconsistent with Article III:4 of
the GATT 1994.
d._
Article 2.2 of
the TRIMs Agreement, because the measures at issue appear to be investment
measures related to trade in goods, compliance with which is necessary to
obtain an advantage, and which require the purchase or use by an enterprise of
products of U.S. origin or from any U.S. source, as provided for in paragraph
1(a) of the Annex to the TRIMs Agreement.
e._
Articles 3.1(b)
and 3.2 of the SCM Agreement, because the Clean Vehicle Credit is a subsidy
contingent, whether solely or as one of several other conditions, upon the use
of domestic over imported goods.
22._
China considers
that the Renewable Energy Tax Credits are inconsistent with the following
provisions of the covered agreements:
a._
Article III:4 of
the GATT 1994, because by conditioning eligibility for bonus subsidy amounts on
the use of U.S.-origin goods, the United States does not accord to products of
Chinese origin treatment no less favourable than the treatment accorded to like
products of national origin in respect of laws, regulations, and requirements
affecting the internal sale, offering for sale, purchase, transportation,
distribution or use of the affected products.
b._
Article 2.1 of
the TRIMs Agreement, because the measures at issue appear to be investment
measures related to trade in goods that are inconsistent with Article III:4 of
the GATT 1994.
c._
Article 2.2 of
the TRIMs Agreement, because the measures at issue appear to be investment
measures related to trade in goods, compliance with which is necessary to
obtain an advantage, and which require the purchase or use by an enterprise of
products of U.S. origin or from any U.S. source, as provided for in paragraph
1(a) of the Annex to the TRIMs Agreement.
d._
Articles 3.1(b)
and 3.2 of the SCM Agreement, because the bonus subsidy amounts available for
the Renewable Energy Tax Credits are subsidies contingent, whether solely or as
one of several other conditions, upon the use of domestic over imported goods.
23._
In addition, and
as a consequence of the foregoing, the measures at issue appear to nullify or
impair benefits accruing to China, directly or indirectly, under the cited
agreements.
* * *
24._
China asks that
this request for the establishment of a panel be placed on the agenda for the
next meeting of the DSB, which is scheduled for 26 July 2024, and that the
DSB establish a panel with standard terms of reference as set out in
Article 7.1 of the DSU.
__________
[1] Section 13401 of the IRA, codified at 26 U.S.C. 30D. The subsidy
programmes enumerated herein sometimes go by different names. The names used in
this request for the establishment of a panel are taken from Building a Clean Energy Economy: A Guidebook to the
Inflation Reduction Act's Investments in Clean Energy and Climate Action
(The White House, January 2023) (version 2), available at http://www.cleanenergy.gov.
[2] Section 13102 of the IRA, codified at 26 U.S.C. 48.
[3] Section 13702 of the IRA, codified at 26 U.S.C. 48E.
[4] Section 13101 of the IRA, codified at 26 U.S.C. 45.
[5] Section 13701 of the IRA, codified at 26 U.S.C. 45Y. The United
States has previously notified the subsidies identified in this request for the
establishment of a panel. See United States, New and Full Notification Pursuant
to Article XVI:1 of the GATT 1994 and Article 25 of the Agreement on Subsidies
and Countervailing Measures (G/SCM/N/401/USA) (10 November 2023), parts 3.15
(renewable energy production credit), 3.16 (energy investment credit), 3.25
(clean vehicle credit).
[6] 26 U.S.C. 30D(d)(1)(G). The U.S. Internal Revenue Service has
defined "North America" for this purpose as consisting of the 50
states of the United States, the District of Columbia, Puerto Rico, Canada, and
Mexico. See Internal Revenue Service, Fact Sheet: "IRS updates frequently
asked questions related to new, previously owned and qualified commercial clean
vehicle credits" (March 2023), FS-2023-08, available at https://www.irs.gov/pub/taxpros/fs-2023-08.pdf.
"Final assembly" is defined under the IRA to mean:
the process by
which a manufacturer produces a new clean vehicle at, or through the use of, a
plant, factory, or other place from which the vehicle is delivered to a dealer
or importer with all component parts necessary for the mechanical operation of
the vehicle included with the vehicle, whether or not the component parts are
permanently installed in or on the vehicle.
26 U.S.C. 30D(d)(5).
[8] 26 U.S.C. 30D(d)(7)(A).
[9] Id., referring to 42 U.S.C. 18741(a)(5)
for the definition of a "foreign entity of concern".
[10] 10 U.S.C. 2533c(d)(2), indirectly incorporated by reference into
the IRA, defines the term "covered nation" to mean the Democratic
People's Republic of North Korea, the People's Republic of China, the Russian
Federation, and the Islamic Republic of Iran.
[11] 26 U.S.C. 30D(e)(2).
[12] 26 U.S.C. 30D(d)(7)(B).
[13] 26 U.S.C. 48(a)(12); 26 U.S.C.
48E(a)(3)(B). The domestic content bonus is reduced to two
percent if certain other conditions relating to wage and apprenticeship
requirements are not satisfied.
[14] 26 U.S.C. 45(b)(9); 26 U.S.C. 45Y(g)(11).